Earnings Labs

Ingredion Incorporated (INGR)

Q3 2012 Earnings Call· Thu, Oct 25, 2012

$112.66

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Transcript

Operator

Operator

Welcome to the Ingredion Incorporated Third Quarter 2012 Earnings Conference Call. [Operator Instructions] This conference is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to Mr. Aaron Hoffman, Vice President of Investor Relations and Corporate Communications for Ingredion Incorporated. Sir, you may begin.

Aaron Hoffman

Analyst

Thank you, Wendy. Good morning, and welcome to Ingredion's third quarter 2012 earnings call. Joining me on the call this morning are Ilene Gordon, our Chairman and CEO; and Cheryl Beebe, our Chief Financial Officer. Our results were issued this morning in a press release that can be found on our website, ingredion.com. The slides accompanying this presentation can also be found on the website and were posted about 1 hour ago for your convenience. As a reminder, our comments within this presentation may contain forward-looking statements. These statements are subject to various risks and uncertainties. Actual results could differ materially from those predicted in the forward-looking statements, and Ingredion is under no obligation to update them in the future as, or if, circumstances change. Additional information concerning factors that could cause actual results to differ materially from those discussed during today's conference call or in this morning's press release can be found in the company's most recently filed annual report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. Now, I'm pleased to turn the call over to Ilene.

Ilene Gordon

Analyst

Thanks, Aaron, and let me add my welcome to everyone joining us today. We appreciate your time and interest. Ingredion posted another very good quarter in the face of headwinds that include rising corn costs, foreign exchange devaluations and challenging macroeconomic conditions in a number of markets. In spite of these factors, we achieved a record level of quarterly sales, operating income and adjusted earnings per share. As you digest the results, you will see that we continue to take appropriate pricing actions that allow us to generally cover higher input costs. And importantly, we also continue to generate volume growth at the same time. At the risk of being repetitive with previous quarters, I would stress that we have a business model that helps mitigate risk, while capitalizing on growth opportunities. It has enabled us to reliably deliver our guidance over many years, report very good results today and raise our earnings outlook as we close out the year. The business model is predicated on producing value-added functional starch and sweetener ingredients for our customers, who are largely providing products in the food, beverage and brewing markets. Said another way, we sell to industries that are generally stable or growing and are important to consumers, and we thoughtfully mitigate risk along the way. Those risks include macroeconomic challenges in some markets, foreign exchange fluctuations and input cost volatility. As our results and our outlook indicate today, we've managed through these headwinds admirably. In fact, we have sufficient confidence in our outlook and the business model that during the third quarter, we raised our dividend by 30% and are now at the high-end of our 15% to 20% payout target. This comes on the heels of 2 dividend increases last year. From an operational perspective, we saw particularly strong results…

Cheryl Beebe

Analyst

Thank you, Ilene. Let me add my welcome, and thanks for joining the third quarter earnings call for Ingredion. As Ilene indicated, we are quite pleased with how the quarter turned out. It's a great way to launch Ingredion. Before we get to the charts, let me add a little color around the quarter. We came into the quarter with a view on pricing and volume. We expected North America and Asia Pacific to continue to deliver on pricing, volume and cost efficiencies. In fact, they did better than we expected. For South America, we expected softer volumes and operating income to be in line with last year. That is what we would deliver this quarter. With respect to EMEA, we are expecting modest volume growth, and that foreign exchange would continue to impact operating income. Volume was basically flat and operating earnings declined about $2 million, again, in line with expectations. So the internal beat was driven by a combination of better performance in North America and Asia Pacific, and a lower tax rate. We had guided to an estimated annual tax rate related to adjusted earnings per share of between 31% and 33%. After completing the third quarter, the estimated annual tax rates used to calculate adjusted EPS is forecasted to be between 29% and 30%. The tax rate improvement is based primarily on several discrete tax items that occurred in the third quarter. Turning to the slide, reported earnings per share was $1.45, and that includes $0.07 of restructuring/impairment charges related to exiting our relatively small joint venture in China, the North American network optimization and Kenya. Add back the $0.07, and the adjusted earnings per share is $1.52, which is a record EPS on an adjusted basis. Lastly, we took the opportunity to refinance the company's…

Ilene Gordon

Analyst

Thanks, Cheryl. As I've done on previous calls, I'll conclude with our strategic blueprint, which continues to guide our decision-making and strategic choices with an emphasis on value-added ingredients for our customers. The blueprint is a good reflection of our successful business model, which enables the delivery of good results in an often volatile world. With a broad portfolio of ingredients sold to many industries across a diverse geographic footprint, we have an enviable position. At the same time, investors can be assured that we have prudent, thoughtful risk management practices. In sum, I believe that we are well-positioned to deliver another good year, while always keeping an eye on our future growth opportunities. And now, we're glad to take all your questions.

Operator

Operator

[Operator Instructions] Our first question today is from Farha Aslam with Stephens.

Farha Aslam

Analyst

I'd like to delve a little bit more on what drove your volume in each of the different geographies. In particular, Asia was very strong. Could you just provide us some color about where the strength came from?

Ilene Gordon

Analyst

Yes, this is Ilene. Well, certainly, as we mentioned on the North America piece, our strength and growth in Mexico for the beer and soft drinks certainly, was a large contributor to that growth. When you go to Asia -- when you look at Korea, again, that's another region where we have a good position in the soft drink and beer industry. And so the growth of those industries really contributed to our position. Certainly, we also have food ingredient opportunities in the Korea area. And for Thailand, again, it's very focused on the food industry. We have a tapioca product that is used both domestically and exported. And so again, I think would be increasing demand for food products with population growth and the economy. We've been able to drive that growth in Thailand. So I would say that those were the 2 countries in the Asia Pacific area that really contributed the most to the volume growth.

Farha Aslam

Analyst

And then, South America, was the weakness in volume because the beverage producers were, particularly, the beer companies were implementing a lot of pricing? And as that is cycled through, is that why you're optimistic about the medium- to longer-term?

Ilene Gordon

Analyst

Yes, the beer companies in Brazil have continued to grow, but their -- the demand has not been as strong as they had expected. And so they are able to actually use a product, the grits, that really is used when they're not looking for the ultimate throughput. Whereas our product, the high maltose, is really very helpful to them when they're really trying to get out a lot of volume. So while they grew, they didn't grow as much as they thought they were going to grow or that they would like to grow, and therefore, they were using a substitute product. Now we are still very bullish on South America because we see the beer companies' forecasts continue to be strong and that the expectation for both the population growth, the growth of the middle-class and the economy, with the GDP forecast for Brazil now, still, is people using the 4% number. We expect that we'll be able to continue to supply that industry in even a stronger way. Of course, the sporting events are going to help in 2012 and 2016, and so a lot of infrastructure is being put in place now in the country, which should also generate some of that demand.

Operator

Operator

Our next question is from Tim Ramey with D.A. Davidson.

Timothy Ramey

Analyst

It's, I think obviously, it was a surprise to the Street that your margin performance was as good as it is. And yes, of course, you've told us this a thousand times, here's -- this is all your business model structure. But it's just -- would love to kind of get into the -- sort of, under the hood of how that actually occurred. Did you -- was it great planning, was it serendipitous pricing? Is there anything you can kind of give us that would help us better understand such a great performance?

Cheryl Beebe

Analyst

Sure. Tim, it's Cheryl. The performance was really driven on a combination of 2 things, the continued strong price/mix and the volume. If you look at the volume in North America, and obviously, North America has a significant weight on the business performance because it's over 50% of the business. And so the continuation of the 4% volume, plus the combination of the continued pricing is really what's driving the North American. On Asia Pacific, frankly, the volume was stronger than what we were expecting. At 12%, I think that's one of the strongest volumes we've seen x acquisition volume in a number of years for Asia Pacific. And as Ilene said, it was driven by a combination of the beverage industry in Korea and the food industry in Thailand. And so those 2 are the main drivers of the continued strong performance, and frankly they did better than what we were expecting. Our operating teams, with all the volatility that shows up in the newspapers and every TV synopsis every night of what's happening in the world, they're just -- they tend to be a conservative bunch and they were not expecting their volumes to be quite as strong. And so the $0.36 beat relative to the midpoint in the guidance range upwind is really 2/3 from the operations, and that is North America and Asia Pacific. We're not doing -- we're holding our own in South America, and frankly, I think we're holding our own in Europe, Middle East, Africa based upon the conditions with regards to currency devaluations, economic activity and slightly slower return to the growth rates that we were expecting in South America. I hope that answers your question.

Timothy Ramey

Analyst

Sure. And Cheryl, you're a conservative bunch around Westchester, too and -- but does that volume growth in Asia make you kind of reset your sights on kind of the growth outlook there or do you think of this as quarterly variability?

Cheryl Beebe

Analyst

I think it's more quarterly variability. And let me address Korea. Korea, we are seeing more sales to the beverage industry. With next year's pricing on corn and with the Thai sugar being down, there's what I'm going to call, we're going to have to see whether or not we grow that volume or maintain that volume. So I think our long-term projections, Tim, of 3% to 4% relative to volume for the company is still a good place to be.

Operator

Operator

Our next question is from David Driscoll with Citi Research.

David Driscoll

Analyst

I wanted just to ask a little bit about the United States. Maybe you can build on some of the comments you've already made. Obviously, we had the warmest July in U.S. recorded history. Can you talk about what that did to your end customers in the United States, and how that affected the quarter itself? If we could start there.

Ilene Gordon

Analyst

Okay, yes. It's Ilene, David. Certainly, the warm summer helped in the U.S. in the beverage consumption. What's interesting is, Mexico also had a very good summer in demand and shipments, but it was a little bit cooler than normal in Mexico. But in spite of that, the demand for beer and soft drinks was still there. So I think that certainly, weather helps in terms of the demand, but I think that most of the strength that you see in North America is really from Mexico, and the demand for both beverage and the food products as a result of the growth of the population and growth of the middle class.

David Driscoll

Analyst

And maybe, just my second and final question and then I'll pass it on, is just -- is back on this concept of the price of high fructose versus the price of sugar in different markets. Do you have any concern that because of where corn is, you start to bump up against, kind of, substitution maximums on the price of high fructose? Can you just go over that a little bit more?

Ilene Gordon

Analyst

Well of course, we're always tracking to see what's happening with sugar and there are differences around the world. Certainly, in the U.S., there'd been enough of a gap, 30% to 40%, and we expect that to continue, certainly, in the U.S. market. I think in Mexico, it's come together a little bit more, but we still see the importance of the blending being used by the customers. And then as Cheryl just mentioned, in Korea, that's another market where you might get a narrowing of the gap. But again, the soft drink companies will be, I expect, using a blend of both depending on the different brands. So it's certainly something to be watched, but there's always another crop coming in sugar. And so we expect there to be certainly, the good dynamics that we've already experienced to continue.

Operator

Operator

Our next question is from Ken Zaslow with BMO Capital Markets.

Kenneth Zaslow

Analyst

So a couple of questions I have. One is on Asia, the profitability. Do you think this is more of a sustainable new rate? I know not this quarter, I heard what you said about the fourth quarter. But generally speaking, do you think you've reached a new profitability level given what you've done on the Asia Pacific business? Can you talk about that?

Cheryl Beebe

Analyst

Sure. Ken, it's Cheryl. I think the Asia Pacific business with, having added in the specialty starch business through the acquisition, gives us an improved outlook performance and profitability. Whereas before, it would've been predicated just, really, the driver would have been South Korea, and then the, kind of, what I call the volatility that would come from the changes and how much we're selling to the beverage industry because of the weight. And so I think, as we look long-term, the growth prospects and the profitability prospects for Asia Pacific are very solid and strong.

Kenneth Zaslow

Analyst

Great. Would you not be surprised if in 2013, you were not able to achieve your long-term growth targets?

Ilene Gordon

Analyst

Ken, it's really too early to comment on 2013. As you know, we're still in the early stages of contracting in North America, and we are expecting higher raw material costs next year. But -- and as we've discussed in the past, we'll sacrifice volume to achieve appropriate pricing pass-throughs. So in terms of next year, the success will really be about how well we achieve that pricing and how will various economies hold up in the turbulent times because you've heard some positive surprises on volume, and we're looking for better volume certainly in South America than we've had this year. So when I look at our history, we've been able to pass through significantly higher input costs, really, over the last few years, and we would anticipate doing the same in 2013. But clearly, 2013 has some unique challenges driven by the drought in the U.S. and therefore, the implications on pricing and sourcing of corn. So we believe the dynamics are good. We still believe in our long-term targets, but we're really not ready to commit to the 2013 yet.

Kenneth Zaslow

Analyst

There was a competitor of yours that put out that -- they said that on a dollar margin basis, they would expect to at least hold, if not increase modestly, their margins in North American high fructose corn syrup. Would you guys be of that same camp given how negotiations have started?

Ilene Gordon

Analyst

Yes, I think it bodes well for that type of comment and for what we're seeing to be able to pass on the corn costs. But again, as I've said, it's very early.

Kenneth Zaslow

Analyst

And then just on the nonoperating side for 2013, just thinking about it. FX should be waning, interest rates should be lower and tax rates should be higher. Could you just give us some parameters to that?

Cheryl Beebe

Analyst

Sure. Assuming everything is equal, the 4 quarters of FX headwinds should mitigate. I don't think we're looking at any significant stepdowns on the currencies. Argentina, when you look at the rate of inflation versus the rate of devaluation, I'd keep my eye on Argentina, but if I could forecast that one, I'd be a very wealthy lady, I wouldn't be a CFO. The second is, interest expense should be lower given the cash flow generation and the fact that we have a pretty low component of interest rates on our long-term debt. And last but not least, the tax rate. This year is somewhat unusual because of the number of restructuring items, as well as some discrete tax items. Ultimately, the tax rate is borne out by the mix of earnings. So this is a -- truly, a forward-looking statement. But as I have guided to in the past, the tax rate could be somewhere between 30% to 32% x discrete items or restructuring.

Kenneth Zaslow

Analyst

But that would be -- nonoperating expenses, would be relatively neutral next year if you offset interest and taxes, is that fair?

Cheryl Beebe

Analyst

Right.

Ilene Gordon

Analyst

And Ken, this is Ilene. And further to what I said before, when you look at the utilization in the industry, and that goes back to an earlier comment on the summer heat and what we see today, that I think with the higher utilization, that also bodes well for companies being able to pass through the corn costs.

Operator

Operator

Our next question is from Akshay Jagdale with KeyBanc Capital Markets.

Akshay Jagdale

Analyst

I just wanted to ask about Mexico. It seems like it's been -- demand has been very strong. Based on my calculations, very roughly, it looks like demand in Mexico for sweeteners' been up double digits. So correct me if I'm wrong there, but if I'm right, I'm just trying to understand, you mentioned population growth and also the incomes rising. But I'm trying to understand why that would lead to sort of 2x -- the demand growing for sweeteners, 2x sort of the rate of GDP growth. I may be missing something but it's -- I'm just trying to get a little bit more color on what's going on in Mexico, how much is the underlying demand growing and what's the sustainability of that?

Ilene Gordon

Analyst

Okay. I think that you also need to think about the demand not just from the population and the growth of the middle-class, there is the consumption of the beer and the soft drink. And we do know that there are brewers. So I don't know the exact demand number. I know you're trying to back into that, but there are brewers in Mexico that actually export to different parts of the world. So even though they're our end customer that we're shipping to, there are brewers that I know and have heard that have exported; as an example, during the Olympics, beer was shipped from Mexico to Europe. So that was contributing to some of that demand, it was being produced in Mexico. So I think one would like to be able to calculate that, but I think you'd have to look at some of the exports of those products and where it's going. But Mexico's a market where we see opportunities not just for beer but for sweetener and even for the food starches, and that would be the other part of the demand. The desire of the Mexican consumer for biscuits and food ingredients for dressings at both restaurants and in the grocery store. I mean that's a piece of that demand. But I think the big piece that you may not be factoring in is some of the exports.

Akshay Jagdale

Analyst

And how sustainable is that, the export piece, in your opinion?

Ilene Gordon

Analyst

I'm not a brewer in Mexico. I've got to believe that there is some economics that makes them successful from that location, and the brand owners certainly, have strategies to develop around the world. So maybe an Olympics is more of a one-off. The next place we're all looking for is Brazil for their sporting events. But I think a lot of it is sustainable because of the population growth and the demand for more sophisticated products in Mexico.

Akshay Jagdale

Analyst

Perfect. And one -- just one last one. This is more general, related to how you manage risks. I was just at an industry conference this week. It seems like -- I just want to know how you manage the risk for corn basis. There's -- obviously, basis has expanded quite a bit and I was hearing this week that farmers are sort of planning on holding on to their corn more so than usual. So can you help me understand -- I mean, I get how you plan your forward hedges on corn, but how do you manage basis risk?

Cheryl Beebe

Analyst

It's a combination where you can -- it's Cheryl. It's a combination of how our contracts are structured as to whether or not the basis risk is in the formula for the pricing. Number two is where you can take a little bit more physical corn. So there's a bit of inventory management around it. And then ultimately, it goes back to our risk management on the gross-to-net corn ratio of managing between those 2 end points based upon what we expect to see in the market, whether or not there's strong demand for corn which is moving the pricing or the opposite way. And I think the model that we're employing, given the volatility we've seen over the last 3 years, has actually served us well.

Operator

Operator

Our next question is from Brett Hundley with BB&T Capital Markets.

Heather Jones

Analyst

It's actually Heather Jones. I just have a couple of questions. First, going to Asia Pacific and South Korea specifically, talking about looking to 2013, Cheryl, you mentioned that you have to see if you grow or maintain volume. And given where world sugar is relative to where HFCS will be given higher corn prices, wondering how you're thinking about that, that makes you believe that it's going to be flat to up, as opposed to a risk of it being down?

Cheryl Beebe

Analyst

Well, it's the expectations that we have for our operating teams is that they have strong customer relations and we're there in the good times and the bad times, so that we basically maintain the business and it's the question of how much of the potential increase in costs, which I can't quantify at this point in time until we actually do some of the negotiations -- do we bear versus what our customer bears.

Heather Jones

Analyst

Okay, and I was wondering if -- one thought, I was wondering if you could speak to the supply, given that we're not looking at a structural change in the U.S. corn market, but it's more drought-related and thus, unless we get another poor crop, should be relatively temporary. How do you think your customers are going to be thinking about changing their recipes for something that would be a largely temporary issue, and just how are you all thinking about that?

Ilene Gordon

Analyst

Well, this is Ilene. Our customers are very focused on new products and ingredient solutions. And so while there are some headwinds for them to pass on their increased cost to consumers in some of their more basic products, there is -- most of the customers are really working on these new products, bringing them to market -- product line extensions that have different recipes and they're putting, they're bringing them in at a higher price point. And they're considered potentially more niche products to start out with. I think on the, what I call the staple products, certainly, we offer solutions that help them take out higher costs of things like oil or certain starches can be substituted for, to help them. And we have a platform that we call Value Matters, that we help customers work through those recipes. But I also think that the customers are very sensitive to the consumer tastes and don't want to fiddle with the recipe for a proven product. So I think it's a combination of strategies. It's looking at the costs that don't affect the taste and then passing through their own input cost increases where it does matter and then, again, really focusing on those new products and value-added products, which all of them talk about the healthy or the good-for-you segment.

Heather Jones

Analyst

Okay. And finally on 2013, and I completely understand it's too early and all, especially to talk about achieving your long-term target of double-digit, but you mentioned that below the line items should be roughly neutral. You've got this portfolio of modified specialty starches that generate pretty good margins and have been generating growth. Some of your regions are generating pretty decent volume growth. I mean, just in broad strokes, do you believe that you should be able to grow the EBIT line in 2013? I mean, I know you don't want to commit to your long-term double-digit thing, but is it reasonable for us to assume that you're going to be able to grow off of this base in 2013?

Cheryl Beebe

Analyst

Heather, it's Cheryl. Going back to Ilene's comments about the challenges next year or there may be opportunities depending upon how it plays out, that if the business model holds as it has in the past, and we've seen both corn prices up and corn prices down, if we are able to continue to price through the input costs on a global basis, then one would expect operating income growth. If we are not able to pass through, then that becomes a different challenge. But again, predicated on the model and the comment about strong utilizations, economic activity may pick up, then that would bode well for growth in operating income. And if those 2 things don't occur, then that's a different story.

Operator

Operator

Our next question is from Christine McCracken with Cleveland Research.

Christine McCracken

Analyst

Just on your comments relative to the inventory adjustment in the U.S. that you're expecting here, I guess, in the fourth quarter, I might have missed it, but is there anything specific, any particular industry that that's affecting or is it across the board?

Ilene Gordon

Analyst

I don't -- exactly know what you're referring to in terms of the inventory adjustment.

Christine McCracken

Analyst

That you referred to in the slides in North America?

Cheryl Beebe

Analyst

U.S. volumes coming down?

Christine McCracken

Analyst

Yes.

Cheryl Beebe

Analyst

Our U.S. operating team thinks that between food and beverage -- that, typically, in the fourth quarter, there tends to be a bit of a contraction. And so they are looking for volumes to be slightly lower than what they were last year in the fourth quarter. But the Mexican volume's up. Obviously, if they're too pessimistic and there isn't a contraction, then there is some upside relative to the numbers.

Ilene Gordon

Analyst

But it's not any of this destocking of the supply chain that we saw in 2009. In fact, as we've said before, nobody really built up the supply chain very much since then. So yes, certainly, as Cheryl said, I think that we think that some customers might clean up their own year-end inventories, but that -- it's not a major change in any trend.

Christine McCracken

Analyst

Okay. I just -- I had questions since it was called out. In any case, just in terms of the specialty corn crop because, obviously, that's a significantly smaller total harvest on a year-over-year basis obviously, and probably it has more of a price impact generally, on the overall market. Are there alternative geographies that you can source some of these specialty products from -- that may or may not have the same kind of weather issues on an annual basis? And then do you manage your inventory so that you have sufficient carry in order to meet your needs for any kind of specialty corns that you might have lost this year in harvest?

Cheryl Beebe

Analyst

It's a good question. This is Cheryl. We have a global supply chain, so we look at sourcing from both the raw material and the finished products from our network, which would be in Asia Pacific, relative to the fact that we grow and produce modified starches in Australia in the specialty grains. We do the same thing in Brazil, and obviously then the U.S. So the U.S. specialty grain crop is more impacted because it's grown in the Indiana geography. So we are using our global supply network to manage that. It is going to be a question of supply and demand and price, but I think that we'll be able to manage our way through this.

Christine McCracken

Analyst

Okay, great. Just one last question. That pricing that you've passed through, you've done a great job, obviously, in several geographies in getting that corn customer. Is there any place, any industry specifically, where you're fighting a lot of resistance just in terms of you've had several years now of price increases, and I'm curious if they're kind of hitting a limit in any particular area?

Ilene Gordon

Analyst

We haven't seen any particular limit. Of course, it's a challenge, certainly, with consumers in terms of paying higher prices. But our product -- we're a small part of the total ingredient cost for our customers. And so while there has been price increases for our ingredients that we've successfully passed through over the past few years, it's still a small part of the total. And as customers focus on new products -- good, healthy products, more value-added products, our ingredients actually are a lower percent of the total consumer price even more. So I think it's certainly a challenge on the consumer, but I think with our value proposition, it will continue to be successful.

Operator

Operator

Our next question is from Vincent Andrews with Morgan Stanley.

Vincent Andrews

Analyst

Just a follow-up on the customer inventory, and maybe it just has to do with the way the contracts are structured or maybe -- you could just help me understand. I would've thought, because corn prices are higher and the perception would be that you guys would be asking for higher prices in next year's contract, that customers would be building inventory exiting the year, not adjusting it. Which part of that am I not understanding?

Cheryl Beebe

Analyst

I think it goes to the fact that we will reprice. We're not going to sell out our inventory at the lower price. We'll manage it as we go through the fourth quarter.

Vincent Andrews

Analyst

Okay, so the contracts, then, maybe this is the part that I've forgotten. When you contract for the year, you contract for the price, not necessarily for the volume, so you have control in the fourth quarter how much you're willing to sell at the price and that's also part of why the inventories are going down?

Cheryl Beebe

Analyst

Yes.

Vincent Andrews

Analyst

Okay, now that makes perfect sense. And another -- a follow-up on the weather questions. Last year, we also had a very warm winter and I don't know if that affects seasonal demand at all, but is there anything to be thought about there?

Ilene Gordon

Analyst

It's Ilene. I do recall that there was actually pretty good demand in the soft drink side and even some of the beer in the March-April timeframe because of the U.S. warmth. And if you recall, our volume growth in the first quarter was 4%. And so I think there was a little bit of that and of course, nobody can forecast the weather. And certainly, the summertime was a nice temperature and the demand was there. But I think, again, when we talk about North America, we still point to Mexico as being the driver of the demand.

Vincent Andrews

Analyst

Okay. And then lastly, could you just touch a little bit on sort of the industrial starch demand, perhaps more in North America than anywhere else, just sort of that's, in my mind, would be the most economically sensitive. And is there any concern about that going into the fourth quarter because traditionally -- I mean not traditionally, but that's where I would sort of expect there to be some destocking, if anywhere.

Ilene Gordon

Analyst

Yes. Industrial has been a smaller and smaller part of our business as it relates to Paper and Corrugated. Certainly, we actually put in our supply to the pharmaceutical industry of dextrose, almost as an industrial product. But if you look at what we traditionally think of as industrial in the paper and packaging, the corrugated industry has been growing 0.2%, 0.3%, 0.4% during this year. It's been steady growth in the last couple of years, but they've not come back to the levels of before 2009. But we've moved our focus away from trying to really grow in that segment. So I don't think that there's any big upset from that industry in the fourth quarter. I think it's just been a low level of growth in the Corrugated and Paper side, and the fourth quarter will be similar and that our growth will come from that food, food ingredient side and some pharmaceutical.

Operator

Operator

Our final question today is from Tim Ramey with D.A. Davidson.

Timothy Ramey

Analyst

Ilene, you probably have a better window into the collective mindset of the food industry for -- relative to Prop 37, the California initiative. I've asked you this before, but we're getting closer and it looks more likely. Any thoughts on how the food industry reacts to that and whether that positions you particularly well?

Ilene Gordon

Analyst

Well what I -- I read the same things that you do and I believe the food industry is prepared to change their labeling accordingly, and they'll certainly have to figure out if there is some impact on some of the food they're producing that they might have been labeling natural or organic that won't qualify. And I know there's a lot of pressure for it not to pass but if it does, we don't see it as a big impact on us because we are serving our customers, and we always have lots of opportunities and options, whether it's GMO, it's non-GMO, our physically-modified starches that really satisfy uniquely the clean label trends in both Europe and the U.S., where our patented product is one of the only one that uses heat and not chemicals. And so again, we see that potentially, as an opportunity for us in some of those products on the West Coast.

Timothy Ramey

Analyst

So your net takeaway is this is more about relabeling than reformulating?

Ilene Gordon

Analyst

Yes. So now that we're at the end of the hour, I just want to make a quick comment to sum up that we believe that the Ingredion business model is performing very well and delivering strong results. And we believe that our model allows us to consistently deliver shareholder value, which is our clear focus and I believe that we've demonstrated. This quarter we delivered record sales, operating income and adjusted EPS. And as we look to the final quarter of the year, we expect further strong year-over-year performance. So that brings our third quarter 2012 earnings call to a close. We'd like to thank you again for your time today. Thank you.

Operator

Operator

Thank you. This does conclude today's conference. Thank you very much for joining. You may disconnect at this time.